Weakness at the Center: An Avalanche-In-Waiting?

A few nights ago, I watched a PBS special called “Anatomy of an Avalanche.” It described in detail how a 1999 snow slide demolished most of a thought-to-be-safe Austrian ski village. It also investigated the causes of avalanches, including how and when they happen. I highly recommend this program to anyone who, like me, is either a big-mountain skier or a high-country climber — or is in any way involved in the fitness business.

The current health club industry is a lot like an avalanche in formation. With my apologies ahead of time to experts, here's how an avalanche forms. A fixed amount of snow at the bottom is covered by another layer that melts over time, causing a somewhat irregular structure as it re-freezes. Then, further precipitation and wind create a top layer that sits on the unstable middle layer. It is only a matter of time — and mass — until the top layer slides off the weaker mid-layer, and a catastrophe has begun. In other words, an avalanche is caused by elemental weakness at the center.

Regular readers of this column will note that I have, for some time, been saying that there is an overabundance of clubs in most marketplaces today. There's too much growth in supply for too little growth in demand.

Likening an avalanche-in-waiting to our business, the base is those clubs that have been around mostly since the modern inception of the industry in the mid-1970s. They are solid operators that are well capitalized, have established their market presence and will likely ride out most storms. I estimate that this sector represents 10 percent of the facilities in the United States or about 3,000 clubs. The top layer consists of all those players that have come into the market within the last half-dozen years. They take many forms, physical-space sizes and types of membership offerings. Many of them are undercapitalized, weak in management structure, poorly marketed and seem to have little understanding of the industry in general. They are very rapidly “heavying” the entire superstructure of this snow mass. They probably represent 40 percent of the facility count or about 12,000 clubs.

The center is the independent, mostly small-in-size (usually less than 20,000 square feet), often designated as “ma-and-pa” operators who came into the business in the mid-1980s through the mid-late 1990s. While they benefited from the surge in both exercise interest and membership inquiries in the 1990s, in general they did not put a lot back into their clubs in terms of re-investment, training of staff and/or re-programming to meet the new needs of varying customer bases. Over the last five years, they have tried to adapt to change (they have “thawed” and “re-frozen”), but they have not successfully done so in the bigger picture. They are a weak center and are in the process of crumbling. They represent roughly half the industry or some 15,000 facilities.

When an avalanche begins, the top layer slides, exposing and pulling with it the less secure middle layer, and then the entire load pulls a piece of the bottom layer with it. In seconds, a hundred thousand tons of snow is hurtling down a mountainside at speeds in excess of 150 miles per hour. It wipes out everything in its path in very rapid fashion. Usually, within less than 3 minutes, the entire event is over, leaving in its wake a heap of destruction, extremely heavily packed snow and a “dust cloud” of finely grained powder that suffocates everything in the air around it.

Following a disaster such as the one described above, the village usually rebuilds, though many who have been there leave and never come back. Some stay and go about business as usual. Often, new money comes in and occupies the spaces left by those who exited. Frequently, a stronger and more avalanche-resistant new town emerges in place of the old.

While I do not believe that a health club industry avalanche would or will occur this rapidly, in relative time the slide is about to begin. The movement of the mass will likely take about two years, the settling out a bit longer than that. But it is clear to me that the conditions are ripe, because the center of our industry is weak.

We can't avoid this blow, and it's much too late to simply fix it. In the rebuilding, I envision new money coming in from outside and building a better, stronger platform for success (it's already happening in some measure). And our great experiment will go on — it just won't be what it used to be.

Michael Scott Scudder is a 30-year veteran of the fitness industry. He is a personal business trainer operating Fitness Focus, a consulting company that offers private workshops on pertinent fitness business matters. Questions and comments are welcomed by Michael at 505-690-5974 or mss@michaelscottscudder.com.